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Key Findings Details

The Interaction between Consumption and Health in Retirement
John Karl Scholz and Ananth Seshadri
WP 2016-344

  • We study the interaction between consumption and health in retirement. Our main contribution is the estimation of a consumption Euler equation taking health into consideration.
  • We find that health shocks play an important role in slowing down the decline of consumption with age in retirement. Without health shocks, retirees will run down their wealth at a much higher speed.
  • We also find that including health into the utility function provides interesting interactions between health and consumption and could help explain the heterogeneous consumption-age profiles related to health.
  • Finally, we find that health investments, such as physical exercise, have a significant effect on the evolutions of both health and consumption in retirement.
  • The findings in this paper suggest that public programs like Medicare and Medicaid play an important role in shaping the consumption and health behavior of the retirees, as well as the retirement and saving decisions of working people.